CFPB Issues Rule to Ban Companies From Using Arbitration Clauses to Deny Groups of People Their Day in Court

On Nov. 1, 2017, the President signed a joint resolution passed by Congress disapproving the Arbitration Agreements Rule under the Congressional Review Act (CRA). Pursuant to the joint resolution, the Arbitration Agreements Rule has no force or effect. On Nov. 22, 2017, the Bureau published a notice removing the Arbitration Agreements Rule from the Code of Federal Regulations. The materials relating to the Arbitration Agreements Rule on the Bureau’s website are for reference only.

WASHINGTON, D.C. — The Consumer Financial Protection Bureau
(CFPB) today announced a new rule to ban companies from using mandatory
arbitration clauses to deny groups of people their day in court. Many consumer
financial products like credit cards and bank accounts have arbitration clauses
in their contracts that prevent consumers from joining together to sue their
bank or financial company for wrongdoing. By forcing consumers to give up or go
it alone – usually over small amounts – companies can sidestep the court
system, avoid big refunds, and continue harmful practices. The CFPB’s new rule
will deter wrongdoing by restoring consumers’ right to join together to pursue
justice and relief through group lawsuits.

"Arbitration clauses in contracts for products like bank accounts
and credit cards make it nearly impossible for people to take companies to
court when things go wrong," said CFPB Director Richard Cordray.
"These clauses allow companies to avoid accountability by blocking group
lawsuits and forcing people to go it alone or give up. Our new rule will stop
companies from sidestepping the courts and ensure that people who are harmed
together can take action together."

Hundreds of millions of contracts for consumer financial products and
services have included mandatory arbitration clauses. These clauses typically
state that either the company or the consumer can require that disputes between
them be resolved by privately appointed individuals (arbitrators) except for
individual cases brought in small claims court. While these clauses can block
any lawsuit, companies almost exclusively use them to block group lawsuits,
which are also known as “class action” lawsuits. With group lawsuits, a few
consumers can pursue relief on behalf of everyone who has been harmed by a
company’s practices. Almost all mandatory arbitration clauses force each harmed
consumer to pursue individual claims against the company, no matter how many
consumers are injured by the same conduct. However, consumers almost
never spend the time or money to pursue formal claims when the amounts at stake
are small.

The Dodd-Frank Wall Street Reform and Consumer Protection Act required
the CFPB to study the use of mandatory arbitration clauses in consumer
financial markets. Congress also authorized the Bureau to issue regulations
that are in the public interest, that are for the protection of consumers, and
which are based on findings that are consistent with the Bureau’s study of
arbitration. Released in March 2015, the study showed that credit card issuers
representing more than half of all credit card debt and banks representing 44
percent of insured deposits used mandatory arbitration clauses. Yet three out
of four consumers the Bureau surveyed did not know whether their credit card
agreement had an arbitration clause. These clauses are not only common and
unknown; they are also bad for consumers. By blocking group lawsuits, companies
are able to:

Deny consumers their day in court: The
study showed that few consumers ever bring – or consider bringing – individual
actions against their financial service providers either in court or in
arbitration. Only about 2 percent of consumers with credit cards surveyed said
they would consult an attorney or consider formal legal action to resolve a
small-dollar dispute. As a result, the real effect of mandatory arbitration
clauses is to insulate companies from most legal proceedings altogether.

Avoid paying out big refunds: Individual
actions get less overall relief for consumers than group lawsuits because
companies do not have to provide relief to everyone harmed. According to the
study, group lawsuits succeed in bringing hundreds of millions of dollars in
relief to millions of consumers each year. The study showed that over 34
million consumers received payments, and that $1 billion was paid out to harmed
consumers over the five-year period studied. Conversely, in the roughly one
thousand cases in the two years that were studied, arbitrators awarded a
combined total of about $360,000 in relief to 78 consumers.

Continue harmful practices: Individual
actions might recoup previous individual losses, but they do nothing to stop
the harm from happening again or to others. Resolving group lawsuits often
requires companies to not only pay everyone back, but also change their conduct
moving forward. This saves countless consumers the pain and expense of
experiencing the same harm. The Bureau’s study found that in 53 group
settlements covering over 106 million consumers, companies agreed to change
their business practices or implement new compliance programs. Without group
lawsuits, private citizens have almost no way, on their own, to stop companies
from pursuing profitable practices that may violate the law.

CFPB Arbitration Rule

The CFPB rule restores consumers’ right to file or join group lawsuits.
By so doing, the rule also deters companies from violating the law. When
companies know they are more likely to be held accountable by consumers for any
misconduct, they are less likely to engage in unlawful practices that can cause
harm. Further, public attention on the practices of one company can more
broadly influence their business practices and those of other companies. Under
the rule, companies can still include arbitration clauses in their contracts.
But companies subject to the rule may not use arbitration clauses to stop
consumers from being part of a group action. The rule includes specific
language that companies will need to use if they include an arbitration clause
in a new contract.

The rule also makes the individual arbitration process more transparent
by requiring companies to submit to the CFPB certain records, including initial
claims and counterclaims, answers to these claims and counterclaims, and awards
issued in arbitration. The Bureau will collect correspondence companies receive
from arbitration administrators regarding a company’s non-payment of
arbitration fees and its failure to follow the arbitrator’s fairness standards.
Gathering these materials will enable the CFPB to better understand and monitor
arbitration, including whether the process itself is fair. The materials must
be submitted with appropriate redactions of personal information. The Bureau
intends to publish these redacted materials on its website beginning in July
2019.

The new CFPB rule applies to the major markets for consumer financial
products and services overseen by the Bureau, including those that lend money,
store money, and move or exchange money. Congress already prohibits arbitration
agreements in the largest market that the Bureau oversees – the residential
mortgage market. In the Military Lending Act, Congress also has prohibited such
agreements in many forms of credit extended to servicemembers and their families.
The rule’s exemptions include employers when offering consumer financial
products or services for employees as an employee benefit; entities regulated
by the Securities and Exchange Commission or the Commodity Futures Trading
Commission, which have their own arbitration rules; broker dealers and
investment advisers overseen by state regulators; and state and tribal
governments that have sovereign immunity from private lawsuits.

In October 2015, the Bureau published an outline of the proposals under
consideration and convened a Small Business Review Panel to gather feedback
from small companies. Besides consulting with small business representatives,
the Bureau sought comments from the public, consumer groups, industry, and
other interested parties before continuing with the rulemaking. In May 2016,
the Bureau issued a proposed rule that included a request for public comment.
The Bureau received more than 110,000 comments.

The rule’s effective date is 60 days following publication in the
Federal Register and applies to contracts entered into more than 180 days after
that.

The Consumer Financial Protection Bureau is a 21st century agency
that helps consumer finance markets work by making rules more effective, by
consistently and fairly enforcing those rules, and by empowering consumers
to take more control over their economic lives. For more information, visit
consumerfinance.gov.